Australian politicians obscuring a tax dodging truth about some family trusts

While it will probably die a quick and painless death, the Australian Labor Party’s leader (and alternate Prime Minister) Bill Shorten got 24 hours of free publicity as a fighter for the “underdog” and a fighter against the discretionary/family trust.

Mr Shorten said Labor would target the “whole different set of rules for people with the financial wherewithal to mine the plethora of choices for aggressively minimising their tax”.

Also, according to the Green Party-associated think tank The Australia Institute,trusts don’t pay enough tax on the basis that because high wealth individuals get the most tax benefits from them, they had to be “looked at”.

The announcement caused an immediate outcry from all the usual suspects, especially those for whom a trust carries a personal or political benefit. In fact they are prevalent enough amongst the high-earning and heavily-investing political class and their constituents that one might think it was dead the moment the idea was raised (and this could have been the reason it was raised – for political effect, no real ”harm” being intended). After all, the Green party and Australian Labor Party members aren’t allergic to wealth, large personal land holdings, negatively-geared investments and…yes…family trusts. Their original working class base had their connection weakened years ago.

The discretionary or family trust, can be described as a legal association between people where the owner of a legal interest in property has to hold his or her interest not for exclusive personal benefit, but also for the benefit of a number of persons listed as being amongst the potential beneficiaries determined by the trust deed. It is an ancient legal mechanism and over centuries has been subject to many changes to correct various evils seen in its operation (and abuse) as a legal entity.

Some of the political outcry now is on behalf of agriculture/ farmers and small business people. For many years they have been allowed to use the trust structure when dealing with family businesses and farms so as to avoid legal and tax ramifications where a mere ownership change due to a death would trigger regular disruption to the continuity of those functioning businesses. Hearing ALP politicians immediately back off on farms and small business trust arrangements, you can safely assume that they are not now in the sights of anyone. There is an election to be won and nobody wants to alienate large segments that easily.

However, it must be noted the incomplete explanation of some of the political heavyweights from the ruling Liberal/National coalition government, namely the Treasurer Scott Morrison and the Deputy Prime Minister, Barnaby Joyce from the rural-based National Party.

Mr Morrison said he had a dormant family trust previously used when he owned a business in 2006 and 2007.

“It’s not something I’ve really particularly used, but I do know it’s used widely by small businesses, by rural small family businesses, by farmers,” he said.

Barnaby Joyce naturally stressed his farmer/agriculture constituency and the continuity it allowed for asset inheritance, but these further comments are highly misleading, to say the least. Especially so from a man who was an accountant prior to entering parliament:

“The way a trust works, a trust doesn’t pay tax unless money is left in the trust, in which case it pays tax at the highest level,” the former accountant said.

“What a trust does, it’s like a partnership, it distributes the money down to the beneficiaries. The beneficiaries pay the tax. It’s not a new concept.

Yes, any income left undistributed to beneficiaries at the end of a financial year attracts tax at the highest marginal rate. No explanation, however, from the Deputy PM that a common operation (in reality: purpose) of such discretionary/family trusts is to fully expend every cent of it, but to allocate it to those family members with the lowest taxable income and thus attract lower tax than those of the family with much higher income and thus higher tax rates. The manipulation of trusts, over time, for tax in Australia is well known. Taxpayers once had large amounts ‘distributed” to young children until parliament had to limit it to income of $460 before it attracted top tax rates for such trusts. When tax avoiders create dozens of $460 trusts in the name of the same child, this had to be outlawed also. So the risk of trusts being used for rampant tax avoidance should never be ignored by politicians, let alone a Treasurer or Deputy Prime Minister.

Trusts have been a very handy vehicle for higher wealth individuals to minimise tax, something which is unavailable to those of lower income and hardly available to the working class. Well may people say that tax minimisation is lawful, but that would be meaningless if the minimisation itself was available only to a few. Due to this inherent skewing towards certain high wealth individuals, the arbitrary allocation of income to a family member with lower/lowest non-trust income creates the differentiation with other taxpayers.

The widespread use of trusts and partnerships is a nice little earner for the higher income earners of this society. Take any medical practitioner, dentist, etc and you can assume until proven otherwise that even if they own the building in which they practice, even if husband and wife, it is the trust/partnership that has the building in its name (and that trust/partnership comprises the dentists/doctors) and they pay rent to that partnership etc. On distribution, they could pay the income to the non-doctor member of the family (it is at the discretion of the trustee ie doctor) and thus minimize tax. Entirely legal, I might add, but something not many people want to talk about to those who can’t take part in this trust device.

Use of discretionary trusts generally could be thought of as being equivalent to tax avoidance, and their use unfair, in my opinion, simply because it allocates as income cash/benefits to a person who has often had no part in earning it and artificially reduces taxable income of a person who has taken a major part in earning it. If it wasn’t for that very sleight of hand there is a simple solution:

If it is fair, demand that all trust income be divided equally amongst every single beneficiary.

Who is going to put that to the test?

In short, it’s all too hard. I don’t think many politicians (nor any financially-advantaged sector of the community) are too keen on having the spotlight put on their own advantages.

Let us wait and see how many days this goes before it is never mentioned again